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Should you renew your PPF account or invest in mutual funds?

A Step-by-step guide for PPF account holders approaching maturity in April. This post shows how to decide between extension vs. withdrawal.

Should you renew your PPF account or invest in mutual funds?


Posted on 16 Mar 2022
Author: Sayan Sircar
10 mins read

A Step-by-step guide for PPF account holders approaching maturity in April. This post shows how to decide between extension vs. withdrawal.

Should you renew your PPF account or invest in mutual funds?

📚 Topics covered:

PPF mechanics

A PPF account matures on 1st April after 15 years from the end of the financial year of opening. This rule works like this:

  • if you opened the account between 1st April and 31st December of Year 20XX, the account will mature on 1st April of 20(XX+16). E.g. an account opened on 1st December 2020 will mature on 1st April 2036
  • if you opened the account between 1st January and 31st January of Year 20XX, the account will mature on 1st April of 20(XX+15). E.g. an account opened on 1st January 2020 will mature on 1st April 2035

This article has more examples of PPF maturity date calculations: When does a PPF account mature?.

Note: Your PPF will mature on 1Apr22 only if you have opened the account between 1Apr08 and 31Mar09. You need to put an extension request between 1Apr22 and 31Mar23.

This post will show the precise steps to decide whether you should continue the PPF account or withdraw to invest in mutual funds or use the amount for other purposes.

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Options of PPF extension

PPF accounts will mature in 15 years but need not be closed immediately. A matured account will keep earning interest if there is any balance. The following rules govern PPF extension:

  • Option 1 is to Withdraw: You can withdraw the entire amount and close the account. To invest further in PPF in the future, you need to create a new PPF account which restarts the 15-year clock. Therefore even if you need the money, you should not close the account immediately. If you do not want to withdraw, you can extend the account and unlimited extensions are allowed in blocks of 5 years.
  • Option 2 is to Extend PPF without fresh investments: if you did not put in an extension request on time, i.e. within a year of the maturity date, then this option gets activated automatically. Partial withdrawals, up to the full balance of the account, are allowed once a financial year (Apr to Mar) but you cannot invest any new money. Investors should explicitly provide an instruction to the bank or post office to avoid this situation
  • Option 3 is to Extend with fresh investments: if you wish, you can invest up to ₹1.5L/year after extension. 80C tax deduction is allowed on this investment. Up to 60% of the corpus can be withdrawn when you decide to extend for each five-year extension with fresh investments once every block of five years.

We need to keep in mind that a PPF account can be kept active with just ₹500/year of investment. Hence, the problem essentially simplifies to:

  • Step 1: Extend the PPF account for five years since this is the most flexible case. As situations change, you can invest more in the account and retain the tax exemption and guaranteed return benefits
  • Step 2: Decide whether to withdraw wholly or partially as per the need by following the steps below

Step 1: Gather information

The question of PPF withdrawal only makes sense in the context of having a proper plan for retirement or other goals against which the PPF account has been tagged as an investment. If you have not done that yet, please follow the goal-setting process first: How do you get the SIP amount for a complete portfolio.

You need to have the following information with you:

  • a list of assets like stocks, mutual funds, bonds, Provident Fund, real estate, jewellery and other investments and their present valuation
  • how much of the assets are illiquid like real estate
  • the targets in place for significant goals as applicable like retirement corpus or children’s higher education or marriage
  • a list of the large expenses planned in the next 5 years like a child’s college education or house purchase
  • an emergency fund for 6-12 times mandatory (that includes any EMI) expenses
  • are any of the major expenses in the next five years dependent on the PPF maturity amount
  • are there any significant outstanding loans like a home loan/business loan
  • are you planning to take a big loan soon for purposes like children’s education
  • will you have a stable income source for the next five years

Step 2: Know your asset allocation

(click to open in a new tab)
Sample strategic asset allocation

Using the information gathered in the previous step, you can use the goal-based investing template to figure out the current and target asset allocation for your goals. The basic premise here is that:

  • money needed for short-term goals should be in debt investments
  • money needed for medium to long-term goals should partially be in risky investments, like equity, with the amount of equity allocation proportional to the time horizon of the goal

Asset allocation as a part of goal-based investing

The goal-based investing template will give you three outputs:

  • current asset allocation: equity and debt proportion
  • target asset allocation: equity and debt proportion to be reached by rebalancing from the current allocation
  • SIP amount to reach your goals along with their own equity to debt split

The process of setting goals and figuring out the asset allocation of each is covered in detail in this post: I am now ready to do goal-based investing. What now?

Step 2: Use the decision tree

The rest is straightforward once the asset allocation is known using the goal-based investing template. There are the following cases:

Money is needed in the next five years

If there are significant goals, like children’s college education due soon, say within the next five years, then some or most of the PPF amount should be diverted to short-duration debt funds as a lump sum.

Excess debt allocation and low equity

Many investors will be in this bucket if they have started with a high allocation to debt assets like PPF and EPF and started equity investing very late. An alternative way to reach this stage is a relatively large fall in the equity markets in the months leading to the PPF maturity.

In this case, you should fix the asset allocation by using a majority of the PPF maturity amount to invest in equity assets. You can follow this guide on investing a lump sum amount into equity by investing first in a debt mutual fund and running an STP as per this post: SIP vs. lump sum: how to invest into equity?.

Excess equity allocation and low debt

The post-March 2020 or similar bull market could have led to cases where the equity allocation has ballooned, leading to an excessive amount of assets in equity. This situation will require an immediate risk reduction by selling equity and getting into suitable debt assets from this list: How to choose debt instruments for retirement?.

You should extend the PPF account with fresh investments per the SIP amount allotted to debt assets.

Case studies

We consider a few case studies with variations of time left until retirement, income stability, and goals due in the next five years. In each situation below the investor should carefully understand their risk profile and income potential for the next ten to fifteen years. There would be a complex interplay between risk taking willingness (“want” to take risk”), risk taking ability (“can” take risk) and risk taking requirement (“need” to take risk) that needs to be considered. A primer on this concept of risk profiling along with a profiling tool to determine your risk profile is discussed here: Do not invest in mutual funds before doing this.

Already retired

Retired investors should reconsider the lure of guaranteed returns of PPF vs the need to balance inflation in the portfolio. We recommend that the retired investor take this ample cash infusion opportunity and create a three-bucket portfolio. You need to make three buckets:

  • Bucket 1: Cash assets for immediate expenses: The purpose of this bucket will be to hold inflation-adjusted living expenses for the next five years
  • Bucket 2: Income assets for stability and future income: The purpose of this bucket is to hold assets that generate income
  • Bucket 3: Growth assets to grow the corpus to beat inflation: This bucket will have everything that is not there in buckets 1, and 2 above and will be primarily equity in the form of index mutual funds

The PPF maturity amount should be considered part of the Cash Bucket 1 and then rebalanced into the other buckets as needed. Any new allocation into Bucket 2 should be left in PPF.

Read more here: How to plan for retirement using the bucket approach?

Salaried investor in the mid-40s

We consider the case of a salaried investor who started a PPF account in their 20s or 30s. There are a few considerations that must be noted:

  • how stable is the income: This point is discussed in more detail in this post: How to prepare today in case you are forced to retire in the next five years?. In such scenarios, liquidity becomes an important consideration and withdrawal of the PPF into more liquid alternatives may be a good option
  • are there major loans: as a result to the above, the PPF amount can be used to pay off a home loan or be used for children’s education

The right way forward will be to use the “Earnings year left” section in the goal-based investing template to ensure that you are realistically modelling the number of years you will have income.

Professional in mid-50s with an undefined retirement date

We consider the hypothetical case of a doctor in their mid-50s who does not have a defined retirement date due to the nature of their profession. However, just because they can, it may not mean that they will be working at their current pace for the next 10-15 years. If major expenses are not planned in the next five years, then the investor should invest a part of their PPF proceeds into equity only if the asset allocation allows it.

NRI investor

NRIs cannot extend the PPF account post-maturity, so they need to reinvest in other investments.

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Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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This post titled Should you renew your PPF account or invest in mutual funds? first appeared on 16 Mar 2022 at https://arthgyaan.com


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